In a shaky oil market, OPEC has to make bitter decisions

These are tough times for the world’s largest oil producers: prices are lower, the health of the global economy is uncertain, and even as the Organization of the Petroleum Exporting Countries tries to cut production, supply from other producers, especially the United States, limited. are growing.

No wonder the group postponed its year-end meeting. Originally scheduled for last weekend in Vienna, the meeting is now scheduled for Thursday, barring another postponement. The agenda – whether to cut production further, and by how much – is likely to be unpalatable to many of the 23 members.

The price of Brent crude, the global benchmark, has fallen to around $82 a barrel from a high of over $96 this year and $128 at its peak at the start of the war in Ukraine.

Oil prices have fallen even as producers in OPEC Plus, a larger group that includes Russia, cut production, but the coming months appear unlikely to give oil producers a reprieve from this pressure.

After three years of pandemic recovery and a robust increase in oil demand, appetite is expected to decline in 2024. The main reasons: China, which accounted for three-quarters of global demand growth in 2023, is facing an economic slowdown. Overall economic growth is expected to be tepid, while more efficient energy consumption and increasing numbers of electric vehicles will reduce oil consumption. With production expected to rise outside OPEC Plus, there will be little need for increased output from the producer group in early 2024, or perhaps even longer, analysts say.

The weak market is putting pressure on Saudi Arabia, the de facto leader of OPEC Plus, to continue and perhaps even deepen production cuts. For example, Saudi Arabia and Russia could push forward the limits of one million barrels per day and 300,000 barrels per day that they agreed on last summer into the new year. The Russian reduction concerns oil exports.

Some smaller OPEC producers, including Nigeria and Angola, are being asked to sign lower production limits that are more reflective of their recent production history, while the United Arab Emirates has been given a higher level.

“There is a good chance the group will agree to some form of additional cuts,” said Richard Bronze, head of geopolitics at research firm Energy Aspects.

At the same time, analysts predict that drilling in countries such as the United States, Guyana and Brazil – which are not members of OPEC – is likely to increase production enough to meet the additional global oil consumption that will arise in 2024 and possibly in later years. year.

The International Energy Agency predicts that global demand will increase by a modest 930,000 barrels per day, an amount that could easily be covered by increases from producers outside OPEC Plus.

Amid the pressure on OPEC, the United States is flourishing as an oil producer and, according to the IEA, will be responsible for 80 percent of global supply growth by 2023. In October, the United States pumped 19.8 million barrels per day, close to the combined total from Russia and Saudi Arabia, the next two largest producers.

Non-OPEC operators generally have an interest in rapid oil production to recoup their investments and make profits.

“The pipeline of non-OPEC projects alone appears sufficient to meet all global demand growth for at least the next few years,” Morgan Stanley analysts wrote in a recent research note.

Iran – an OPEC member exempt from cuts because its oil exports are subject to Western sanctions – is adding to the supply. Thanks to what analysts say is an easing of enforcement of those sanctions, Iran has increased production by 30 percent since 2021 to 3.1 million barrels per day, figures from the producer group show.

Of course, events can upset predictions. The picture would be very different if the now-suspended fighting in Gaza were to spread to the broader Middle East, where some of the world’s biggest producers are centered around the Persian Gulf, along with shipping lanes that carry their oil to customers.

For now, however, oil traders see little chance of a broader conflict.

OPEC’s influence on markets is weakened when non-OPEC countries are better positioned to meet growing demand. OPEC Plus was forced to make a series of cuts last year to maintain prices and prevent a build-up of oil reserves in tank farms.

Cutting production helped push prices above $90 a barrel for benchmark Brent crude in September, but OPEC Plus has paid a price in lost sales. The Saudis, who are bearing the brunt of the cuts, produce only nine million barrels per day, almost two million fewer than a year ago.

These cuts also reduce oil revenues that are crucial to Saudi Arabia’s government budget and its ambitions to invest in non-oil businesses, including the LIV professional golf tour and Newcastle United, a football team in the English Premier League.

This month, for example, Saudi Aramco, the national oil company, partly blamed lower oil sales for a 23 percent drop in net profit in the third quarter, down $10 billion, from a year earlier.

“We are not far from the point where quotas become unrealistically low,” said Gary Ross, CEO of Black Gold Investors, an investment firm.

Saudi Arabia is not the only producer under pressure. Abu Dhabi, the oil powerhouse in the heart of the United Arab Emirates, has enlisted international partners to increase its production capacity to five million barrels per day, but must still keep production at 3.2 million within the quota set in June for 2024 established.

For now, analysts say, OPEC members appear to be sticking together. After all, that’s $80 a barrel This is preferable for producers to the market collapse that could result if the Saudis fully turned on the taps, as they did recently in 2020, when prices fell more than 9 percent in one day to around $45 per barrel.

Failure to reach an agreement is “a risk that OPEC Plus cannot afford,” said Homayoun Falakshahi, an analyst at research firm Kpler.